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Timberworld Ltd v Levin

Court of Appeal CA842/2013; CA226/2014; [2015] NZCA 11128 August 2014; 24 April 2015O’Regan P, Stevens and Miller JJ

Company law – Liquidation – Voidable preferences – Statutory interpretation ofs 292(4B) – Starting point for assessing quantum of preference – Whether peakindebtedness rule adopted from Australia – “Peak indebtedness rule” –“Specified period” – “All transactions” – Companies Act 1993, s 292.

Bankruptcy and insolvency – Rights of creditors – Voidable preferences –Whether certain trade creditors set apart from general pool – Starting point forassessing quantum of preference – Whether peak indebtedness rule adoptedfrom Australia – “Peak indebtedness rule” – “Specified period” – “Alltransactions” – Companies Act 1993, ss 292 and 295.

Timberworld Ltd had supplied Northside Construction Ltd with buildingsupplies through a running account commencing in January 2006, through toApril 2010. Similarly, Z Energy Ltd supplied bitumen to Tarsealing 2000 Ltdthrough a running account that began operating in February 2010 and ceased inOctober 2010 when the running account was $0. The entire course ofTarsealing’s trading with Z Energy occurred over the 17-month period fromFebruary 2010 to July 2011. In both cases, Mr Levin and Ms Madsen-Ries, theliquidators of the debtor companies, sought to apply the Australian “peakindebtedness” rule to the running accounts when calculating the start point fordetermining whether the creditors (Timberworld and Z Energy) had obtained apreference. The application of the peak indebtedness rule enabled theliquidators to choose the point during the specified period of two years prior tothe commencement of the liquidations (s 292(5) of the Companies Act 1993)when the relevant indebtedness was at its highest, as opposed to an earlier datethat would take transactions predating peak indebtedness into account.

In each case, the High Court held that the liquidators were not entitled toadopt the peak indebtedness rule. The specific issue concerned the permissiblestarting point when assessing the existence and effect of a “single transaction”under s 292(4B) of the Act. In the case of Z Energy the liquidators appealedagainst the High Court’s dismissal of a claim for $293,555.86 (being the peakindebtedness sum), said to comprise a voidable transaction under s 292. Thatdismissal would have brought the claim to an end. In the case of Timberworldthe liquidators cross-appealed against the High Court’s dismissal of a claim for$47,963.95 (being the difference between the peak indebtedness sum and thebalance owing to Timberworld when the running account ceased to operate)instead finding that Timberworld received the sum of only $29,490.46 as apreference over other creditors, calculated by a straightforward application ofthe continuing business relationship provision established in s 292(4B).

3 NZLR 365Timberworld v Levin

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The liquidators contended that s 588FA of the Corporations Act 1992 (Cth)must be taken to have permitted the application of the peak indebtedness ruleand because the New Zealand legislature had modelled s 292(4B) of the Act ons 588FA to import the running account principle, the application of the peakindebtedness rule should be included. It was further contended that the peakindebtedness rule was better characterised as the “net preferential receipt”approach because it sought to identify and recover the net preferential sumreceived by a trade creditor, and that this approach (through the application ofthe peak indebtedness rule) should be adopted as the conventional approach inNew Zealand.

Held: 1 Whether or not the peak indebtedness rule applied in New Zealand wasa question of statutory interpretation. The purpose of preference law ininsolvency was to achieve equality between creditors according to priorities setout in the Act, to promote a collective, orderly and cost-effective approach tothe management of failed companies, and to share the consequent burden ofloss. The voidable preference provisions did not seek to achieve fairness asbetween the creditor and the company, but between the creditor and othersimilar creditors. There was no reference to the peak indebtedness rule in thewording of s 292(4B). Rather, s 292(4B)(c)(1) applied in relation to “all thetransactions” forming the continuing relationship between creditor and debtorand those transactions were to be treated as together constituting a “singlenotional transaction”. The statutory wording did not permit a liquidator todisregard some of the transactions falling within the running account. Therewas no basis on which the liquidator could commence with the first paymentand disregard the first supply of goods. The assessment of the transactionscommenced when the specified period commenced. With Z Energy the runningaccount started after the specified period had commenced so the starting pointwas the first transaction. To arrive at some artificial point during the course ofall the relevant transactions and to select the date of peak indebtedness(resulting in the transactions prior to this point being disregarded), would be toignore the express wording of the statute (see [61], [64], [65], [66], [68], [69]).

2 The legislative history of s 292(4B) centred on replacing the “ordinarycourse of business” test with the running account principle. There was noevidence of any preparatory discussion of, or reference to, the peakindebtedness rule. The New Zealand adoption, in similar language, ofs 588FA(3) of the Australian legislation did not mean that the peakindebtedness rule must also be adopted. The leading Australian case cited toargue in favour of peak indebtedness was not a peak indebtedness case but arunning account case. Other Australian cases that accepted the peakindebtedness rule did so on the ground that the rule was settled law, withoutanalysing its relationship to the legislation. In any event, the practical operationof the peak indebtedness rule was problematic and its policy justification thatall creditors be treated equally went against the New Zealand Parliament’sintention to set apart certain trade creditors from the general pool of unsecuredcreditors, thus encouraging trade creditors to continue providing value tocompanies in financial distress. Recourse for ordinary creditors fell unders 296(3). Parliament had chosen not to adopt the peak indebtedness rule. It wasnot part of the law in New Zealand (see [72], [73], [74], [84], [92], [93], [94],[95], [97], [98], [99]).

366 [2015]Court of Appeal

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3 The “running account” under s.292(4B) is limited in operation to thespecified period (see [107]).

4 There was no unfairness of a kind that would justify the Court exercisingits discretion under s 295 in favour of Timberworld (see [113]).

Allied Concrete Ltd v Meltzer [2015] NZSC 7, (2015) NZBLC 99-717applied.

Farrell v Max Birt Sawmills Ltd [2014] NZHC 3391 distinguished.Airservices Australia v Ferrier (1996) 185 CLR 483, (1996) 137 ALR 609

considered.Re Weiss; ex parte White v John Vicars & Co [1970] ALR 654 (FCA)

considered.CSR Ltd v Starkey (1994) 13 ACSR 321 (QSC) considered.Rothmans Exports Pty Ltd v Mistmorn Pty Ltd (in liq) (1994) 15 ACSR

139 considered.Olifent v Australian Wine Industries Pty Ltd (1996) 19 ACSR 285 (SASC)

considered.

Result: Appeals in CA842/2013 and CA226/2014 dismissed. Cross-appeal inCA842/2013 dismissed.

Observation: These appeals raise an important issue concerning the operationof s 292 of the Companies Act 1993, specifically the permissible starting pointwhen assessing the existence and effect of a “single transaction” unders 292(4B)(c). The appeals are significant for both liquidators (who will seek touse the point where indebtedness of the company is at its highest) and creditors(who will seek to use an earlier date so that any increase in indebtedness isoffset by earlier transactions through which the creditor supplier gave value tothe debtor company). The submission that it is unfair to prefer certain tradecreditors, as the running account approach does, is a matter for legislativeconcern and not a matter for judicial intervention (see [1], [2], [5], [95]).

Other cases mentioned in judgmentBlanchett v McEntee Hire Holdings Ltd HC Rotorua CIV-2010-463-270, 5

August 2010.Burness v Supaproducts Pty Ltd [2009] FCA 893, [2009] 259 ALR 339.Clifton v CSR Building Products Pty Ltd [2011] SASC 103.Jollands v Mitchill Communications [2011] NZCCLR 20 (HC).Petagna Nominees Ltd v Ledger (1989) 1 ACSR 547 (WASC).Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266, [1966] ALR 855.Rea v Russell [2012] NZCA 536.Rees v Bank of New South Wales (1964) 111 CLR 210.Richardson v Commercial Banking Corp of Sydney (1952) 85 CLR 110.Sheahan v Fabienne Pty Ltd (1999) 17 ACLC 1,600 (SASC).Starkey v APA Transport Pty Ltd (1993) 12 ACSR 15 (QCA).Sutherland v Eurolinx Pty Ltd [2001] NSWSC 230, (2001) 37 ACSR 477.Sutherland v Lofthouse [2007] NSWCA 197, (2007) FLR 157.V R Dye & Co v Peninsula Hotels Ltd (in liq) [1999] 3 VR 201 (VSCA).

AppealsThis was an appeal and a cross-appeal by Henry David Levin and VivienneJudith Madsen-Ries, the liquidators and appellants in CA226/2014 and therespondents in CA842/2013, from the decisions of Associate Judge Doogue


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[2014] NZHC 688 and Associate Judge Abbott [2013] NZHC 3180respectively, finding the liquidators were not entitled to adopt the “peakindebtedness” rule when calculating the start point for determining whether thecreditors, Timberworld Ltd, the appellant in CA842/2013, and Z Energy Ltd,the respondent in CA226/2014, had obtained a preference.

DW Grove for Timberworld Ltd.CA Murphy and JG Cole for the liquidators.RJ Gordon for Z Energy Ltd.

Cur adv vult

The judgment of the Court was delivered bySTEVENS J.

Table of contents

Para no

Introduction [1]

Factual background [7]

Z Energy [7]

Timberworld [11]

The High Court judgments [14]

Statutory framework [27]

Treatment of continuing business relationships [29]

The peak indebtedness rule [35]

Use of peak indebtedness rule in Australia [37]

Statutory form of running account principle in Australia [42]

Developments in New Zealand [47]

The liquidator’s appeal and cross-appeal [53]

The case for peak indebtedness [53]

Our analysis [61]

The purpose of preference law in insolvency [62]

Legislative context [68]

Importing s 588FA into New Zealand law [72]

Airservices Australia v Ferrier [75]

Practical effect of peak indebtedness [85]

Policy justification [93]

Allied Concrete [97]

Conclusion on peak indebtedness [99]

Timberworld’s appeal [100]

Did the liquidators prove Northside was insolvent? [101]

Interpretation of s 292(4B) – all transactions or specified period? [104]

Application of s 295 of the Act [115]

Result [115]

Introduction[1] These two appeals were heard together because each raises an importantissue concerning the operation of s 292 of the Companies Act 1993 (the Act).


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The liquidators (Henry Levin and Vivienne Madsen-Ries) (together, theliquidators) contend that the High Court erred in each case by holding theywere not entitled to adopt the “peak indebtedness” rule when calculating thestart point for determining whether the creditors (respectively Timberworld Ltdand Z Energy Ltd) had obtained a preference. This rule would enable theliquidators to choose the point during the two-year specified period when therelevant indebtedness was at its highest, as opposed to an earlier date takinginto account transactions predating peak indebtedness.[2] The liquidators sought to apply this peak indebtedness rule to runningaccounts with the debtor companies in each case (respectively NorthsideConstruction Ltd (Northside) in the Timberworld appeal and Tarsealing 2000Ltd (Tarsealing) in the Z Energy Ltd appeal – both in liquidation). The specificissue in each case concerns the permissible starting point when assessing theexistence and effect of a “single transaction” under s 292(4B)(c) of the Act.[3] In Levin v Z Energy Ltd (CA226/2014) the liquidators appeal against thejudgment of Associate Judge Doogue dismissing a claim for $293,555.86 pluscosts and interest, said to comprise a voidable transaction under s 292 of theAct.1 The parties agree that if the appeal is dismissed, the claim is at an end.[4] In Levin v Timberworld Ltd (CA842/2013) the liquidators’ claim arisesby way of a cross-appeal seeking to reverse a finding by Associate JudgeAbbott in which he dismissed a claim for $47,963.95, on the basis that therewas a voidable transaction, by applying the peak indebtedness rule.2 Instead theAssociate Judge found Timberworld received the sum of only $29,490.46 as apreference over other creditors, calculated by a straightforward application ofthe continuing business relationship provision, established in s 292(4B). Inaddition the sum of $44,250 was obtained after the end of the running account,independently constituting a voidable. For its part Timberworld appealsseparately, contending the Associate Judge erred in three respects in awardingthese sums to the liquidators.[5] These appeals are significant for both liquidators and creditors generally.Where there is a continuing business relationship between the parties (such aswith a running account) the provisions of s 292(4B) may protect a creditor atthe suit of a liquidator seeking to prove the existence of an insolventtransaction. Section 292(4B)(c) allows for consideration of all the transactionsforming part of the relationship “as if they together constituted a singletransaction”. Thus it is necessary to identify a start point from which alltransactions (both supplies of goods and services, and corresponding payments)are to be combined and considered as a single transaction. Naturally liquidatorswill wish to use the point where the indebtedness of the company is at itshighest. On that basis, any later transactions under which the creditor providesfurther value to the company will be exceeded in value by other transactionsreducing the company’s indebtedness. Liquidators could then point to the netreduction in indebtedness as amounting to a preference. Suppliers, however,will seek to use an earlier date so that any increase in indebtedness is offset byearlier transactions through which the creditor supplier gave value to the debtorcompany.

1 Levin v Z Energy Ltd [2014] NZHC 688 [Z Energy Ltd High Court judgment].2 Levin v Timberworld Ltd [2013] NZHC 3180 [Timberworld Ltd High Court judgment].


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[6] It is convenient to address first the liquidators’ appeal as to peakindebtedness in Z Energy Ltd and their cross-appeal in Timberworld Ltd. Wewill then deal with the three separate issues raised by the Timberworld case. Wesummarise first the factual background in each case.

Factual backgroundZ Energy[7] The debtor company Tarsealing was incorporated in 1999. It carried onbusiness undertaking contract asphalting work, primarily for TransitNew Zealand (now NZTA) and local authorities. It was placed in liquidationon 4 May 2012. The specified period under s 292(5) of the Act ran from21 November 2009 to 4 May 2012 when Tarsealing was liquidated by theCommissioner of Inland Revenue as substituted creditor.[8] In October 2009 Tarsealing applied for a trade credit account withZ Energy for the purchase of bitumen for use in carrying out its asphaltingworks. The credit account opened in December 2009 and Tarsealing beganoperating it in February 2010. The entire course of trading with Z Energyoccurred over the 17 month period from 28 February 2010 to 21 July 2011.There is no dispute between the parties that a running account applied duringthis time.[9] According to a schedule of transactions prepared by the liquidators, thebalance of the running account at the start of the specified period was $0, giventhat trading only began on 28 February 2010. The balance of indebtednesspeaked on 30 April 2010 at $293,555.86. The running account returned to $0 inOctober 2010 when Tarsealing ceased trading with Z Energy for reasonsunknown to the latter. No further credit was advanced after that time.[10] The liquidators sought to challenge the $293,555.86 received byZ Energy on the basis that, using the peak indebtedness rule to select thecommencement date at which to calculate the “single transaction”, it is avoidable transaction.

Timberworld[11] The debtor company is Northside. It carried on business as aconstruction company. Timberworld had provided it with building suppliesthrough a credit account commencing in January 2006. The specified periodunder s 292(5) ran from 24 May 2009 until 15 July 2011 when Northside wasput into liquidation.[12] There is no dispute the commercial relationship operated as a runningaccount from the time when the credit account was opened in January 2006through to 15 April 2010 when trading effectively ceased. The running accountwithin the specified period applied between 24 May 2009 and 15 April 2010.Within this period the running account peaked at $95,569.55 on 2 October2009. When supply under the running account ended on 15 April 2010 thebalance was $47,605.60, constituting an improved position for the creditor of$47,963.95. This was the amount the liquidators sought to challenge as avoidable preference received by Timberworld using the peak indebtedness rule.If the commencement of the specified period were used as the starting point, thequantum of the preference claim up to the end of the running account amountedto $29,490.46.


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[13] As noted, the liquidators were successful in recovering the lesser amountof $29,490.46. In addition the liquidators successfully claimed $44,250, beinga further sum paid after the running account ceased, also constituting a voidabletransaction.

The High Court judgments[14] We summarise first the parts of the judgments under appeal dealing withthe application of s 292 of the Act and the liquidators’ reliance on the peakindebtedness rule.[15] Associate Judge Abbott in Timberworld correctly emphasised that thepreferential effect of a challenged transaction is to be judged objectively.3 Suchan assessment is to be “effects-based”, so the intent of the company and thecreditor is irrelevant.4 The liquidator must show that the creditor received agreater payment than it would in liquidation. This necessitates a comparisonbetween what the creditor actually received and what it would have received inthe liquidation as a member of the general body of creditors.[16] The liquidators argued the preference Timberworld received was theimprovement of its position from the point of peak indebtedness within thespecified period. Their argument relied, as before us, on Australian authorityanalysing the comparable provision to s 292. The Associate Judge referred toan earlier decision of his in Shephard v Steel Building Products (Central) Ltdin which he drew on the decision of the High Court of Australia in AirservicesAustralia v Ferrier to support a conclusion that s 292 did not permit the use ofthe peak indebtedness rule.5 The Associate Judge saw no reason to depart fromhis reasoning and decision in Shephard, stating:6

[52] ... In the absence of any language suggesting that Parliament intendedto allow more than one way of determining the single transaction givingrise to the preference, it must be assumed that a single method wasintended. There is nothing in the wording of s 292 to support theavailability of more than one method of determining the single transaction,and there is no good reason, in my view, to read that into the statute.Moreover, although the majority of the High Court of Australia inAirservices Australia v Ferrier did not explicitly reject the peakindebtedness rule, there was no question that it did not apply it:

Throughout the six-month period, Airservices provided Compass withservices whose value far exceeded the value of the payments thatCompass made during that period. At the end of the six-month period,Airservices was more than $8 million worse off than it had been at thecommencement of the period.

[53] Legal commentators have pointed out a number of arbitrary featuresto the single transaction concept. However, ultimately that is a matter forthe legislature. As I construe s 292, the single transaction is determined byreference to all transactions in the continuing business relationship, withinthe specified period.

3 Timberworld High Court judgment, above n 2, at [40].4 P Heath & M Whale (eds) Heath & Whale on Insolvency (looseleaf ed, LexisNexis) at

[24.50].5 Shephard v Steel Building Products (Central) Ltd [2013] NZHC 189; Airservices

Australia v Ferrier (1996) 185 CLR 483.6 Timberworld High Court judgment, above n 2, (footnotes omitted).


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[17] On that basis Associate Judge Abbott found the preference Timberworldreceived from the single transaction created by the running account within thespecified period was $29,490.46. Had the peak indebtedness rule been applied,the preference from the single transaction would have been $47,963.95.7

[18] In Z Energy Associate Judge Doogue also referred to the Australian caseof Airservices Australia, noting the majority suggested the start point of therunning account is not a matter to be decided by the liquidator. He also referredto Associate Judge Abbott’s judgment in Shephard and concluded that forsimilar reasons he rejected the contentions of the liquidators that they areentitled to nominate the starting point of the continuing business relationship.8

[19] Referring to various passages from Airservices Australia, AssociateJudge Doogue stated:

[25] I consider that would be inconsistent with the policy identified asunderlying the running account type cases to allow enquiry about whetherthere had been a voidable transaction to focus upon the state of the accountat one particular point during the duration of the continuing businessrelationship and to nominate the indebtedness at that point as significant inmeasuring whether or not there had been a voidable transaction. To do sowould be to ignore the importance of assessing the overall effect of all ofthe transactions making up the running account which the partiesmaintained pursuant to their continuing business relationship.

[20] Associate Judge Doogue was satisfied the business arrangementsbetween the parties amounted to a continuing business relationship in the formof a running account.9 Further, the continuous business relationship covered theentire course of trading between Tarsealing and Z Energy. Accordingly the casefell to be dealt with under s 292(4B) of the Act.[21] With respect to the application of s 292, the liquidators could only claima preference if, upon applying the section, the net or overall effect of thecontinuing business relationship was to result in Z Energy being able to receivemore towards a satisfaction of a debt owed by Tarsealing than it would receiveor be likely to receive in liquidation. But the Associate Judge concluded thetransactions in the sequence making up the running account were of neutraleffect. There was therefore no possibility of Z Energy receiving more than itwas entitled to in the liquidation and so no preference was conferred.10

[22] Given the existence of a running account covering the entire course oftrading between the parties, the Associate Judge concluded:

[35] ... The enactment of provisions relating to a running account duringthe course of a continuing business relationship has the practical effect ina case of this kind that if the result of trading was to return the parties’accounts to a neutral position where neither party owes the other, thenthere cannot be any voidable transaction. If on the other hand, there hadbeen an antecedent debt that came into existence independently of thedealings that comprise the continuing business relationship and if apayment was made in the course of the relationship which exceeded theliabilities of the company arising from the relationship, then an insolventtransaction would be a possibility. Such a transaction would have occurred

7 At [53]–[54].8 Z Energy Ltd High Court judgment, above n 1, at [17].9 At [32].10 At [34].


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if the excess payments made by the company to the creditor were retainedby the creditor and applied in reduction of the antecedent debt. That,however, did not occur in this case. At the commencement of the tradingrelationship, the indebtedness of the company to the respondent was nil.The various transactions making up the running account all set each otheroff so that even had there been antecedent debt, the running balance wouldhave been neutral in its effect.

[23] Accordingly, Associate Judge Doogue found there had been no insolventtransaction.[24] Since the appeals were heard the High Court has again considered theavailability of the peak indebtedness rule to liquidators in Farrell v Max BirtSawmills Ltd.11 Associate Judge Bell was dealing with a somewhat unusualcase of supplies going both ways between the parties to a continuing businessarrangement. The creditor was to supply logs to the debtor company whoprocessed them and returned sawn timber to the creditor of roughly equal value.But an imbalance developed over time. The debtor company was eventually putinto liquidation and the issue to be determined was whether the liquidatorscould recover from the creditor an amount representing a preference over othercreditors.[25] The amount to be recovered depended on the start point taken and theavailability of the peak indebtedness rule. Differing from the approach taken inthe present appeals, Associate Judge Bell held that s 292(4B) permitted theliquidators to use the peak indebtedness rule. By way of summary on this point,he said:12

In Farrell v Fences & Kerbs Ltd,13 the Court of Appeal declined to followthe Australian approach to “gave value” in s 296(3)(c) [of the CompaniesAct 1996] because of crucial differences with the Australian statute. But inthe case of a continuing business relationship in which debt levels fluctuatewith supplies and payments, where the identical words in the Australianstatute have been inserted into s 292, it would be perverse for the meaningof the statute to change according to the side of the Tasman it is applied on.Peak indebtedness does provide a rational basis for establishing a pointfrom which any preferential reductions in debt can be measured. Taking anearlier point entails allowing an earlier transfer of value to be brought intoaccount in working out whether there is a preference: that is inconsistentwith the general approach in an effects-based regime for preferentialtransactions. There is nothing in the text or the purpose of the Act formaking a special case for suppliers in a continuing business relationship torequire them to be treated more favourably than other creditors. Aside fromdebt spikes for commercially simultaneous supplies and payments, thepeak debt is to be used in measuring the extent of preference unders 292(4B). For these reasons, I regretfully decline to follow other caseswhich have not applied peak indebtedness.

[26] We will address this reasoning in our analysis on the peak indebtednessrule. We commence our analysis by first setting out the relevant statutory

11 Farrell v Max Birt Sawmills Ltd [2014] NZHC 3391.12 At [77].13 Farrell v Fences & Kerbs Ltd [2013] NZCA 91, [2013] 3 NZLR 82.


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framework at issue, before addressing the case for the liquidators. Thediscussion will include a reference to the recent Supreme Court judgmentdealing with another aspect of the voidable preference provisions of the Act.14

Statutory framework[27] The starting point for analysis must be the statutory frameworkgoverning continuous business relationships in New Zealand.[28] Section 292(1) of the Act provides that a transaction by a company isvoidable by a liquidator if it is an insolvent transaction and is entered intowithin the specified period of two years prior to the commencement of theliquidation.15 Section 292(2) and (3) respectively define the terms “insolventtransaction” and “transaction” as follows:

(2) An insolvent transaction is a transaction by a company that—(a) is entered into at a time when the company is unable to pay its due

debts; and(b) enables another person to receive more towards satisfaction of a

debt owed by the company than the person would receive, orwould be likely to receive, in the company’s liquidation.

(3) In this section, transaction means any of the following steps bythe company:

(a) conveying or transferring the company’s property:(b) creating a charge over the company’s property:(c) incurring an obligation:(d) undergoing an execution process:(e) paying money (including paying money in accordance with a

judgment or an order of a court):(f) anything done or omitted to be done for the purpose of entering

into the transaction or giving effect to it.

Treatment of continuing business relationships[29] Ordinarily, the operation of s 292(1)–(3) renders every insolventtransaction in principle, recoverable by the liquidator. Individual payments areaggregated to form the amount eventually sought to be returned to the generalpool for distribution. However, this straightforward calculation of preferencesis altered in the case of a “continuing business relationship”. The principlesapplicable to qualifying relationships of that nature between a company and acreditor are addressed in s 292(4B):

(4B) Where —(a) a transaction is, for commercial purposes, an integral part of a

continuing business relationship (for example, a running account)between a company and a creditor of the company (including arelationship to which other persons are parties); and

(b) in the course of the relationship, the level of the company’s netindebtedness to the creditor is increased and reduced from time totime as the result of a series of transactions forming part of therelationship;

then —

14 Allied Concrete Ltd v Meltzer [2015] NZSC 7, (2015) NZBLC 99-717.15 For the purposes of subss (1) and (4B), the term “specified period” is defined in s 292(5)

of the Companies Act 1993.


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(c) subsection (1) applies in relation to all the transactions formingpart of the relationship as if they together constituted a singletransaction; and

(d) the transaction referred to in paragraph (a) may only be taken tobe an insolvent transaction voidable by the liquidator if the effectof applying subsection (1) in accordance with paragraph (c) is thatthe single transaction referred to in paragraph (c) is taken to be aninsolvent transaction voidable by the liquidator.

[30] Thus a series of transactions will be treated as a single transaction wheresuch transactions are an integral part of a continuous business relationshipbetween the parties (as where the parties have used a running account) and thelevel of the debtor company’s indebtedness fluctuates from time to time as aresult of the various individual transactions. With a transaction of this type theliquidator will only be entitled to claim the net difference of payments madeand goods and services received from a creditor, where there is an ongoingbusiness relationship with the debtor company.16

[31] Section 292(4B) is based on s 588FA of the Corporations Act 1992(Cth) which adopted the concept of the “running account” as it has developedin Australian insolvency law.17 The applicable principles acknowledge thatpayments made by a company to a creditor in order to maintain a genuinebusiness relationship are not preferences, because a mutual assumption existsbetween the parties that the business relationship will be for the benefit of bothparties.[32] The key legal consequence of establishing the existence of a continuingbusiness relationship is the application of s 292(4B)(c) and (d), namely, theseries of numerous transactions, occurring as part of the continuingrelationship, are treated as constituting one single transaction. To assesswhether a preference arises, a comparison is made between the amount owed tothe creditor at the point at which the assessment commences and the amountowed at the time of liquidation.18 A net increase in indebtedness to the creditor,for example, indicates no preference was received, despite the continuedexchange of value for goods throughout the running account. A net decrease inindebtedness, however, indicates a permanent reduction in the balance owing tothe creditor was achieved, and indicates that to such an extent the creditor hasreceived a preference over others.[33] The development of this doctrine by Australian courts had occurred overthe course of a number of decades. The High Court of Australia has mostrecently described the principle thus:19

16 Allied Concrete Ltd v Meltzer, above n 14, at [21].17 For a comprehensive outline of the legislative reforms introduced by the Insolvency Law

Reform Bill (14-1), see the discussions of Arnold J and Elias CJ in Allied Concrete Ltd vMeltzer, above n 14, at [28]–[53] and [139]–[143] respectively. The Supreme Court citedwith approval the description of the running account principle given by David J Purcell in“Banks and the Recovery of Voidable Preferences” (1990) 2(1) Bond LR 107 at 110: at[21].

18 In the present case the creditors say the assessment commences from the beginning of thespecified period or the beginning of the continuing relationship, whichever occurs later.The liquidators say they are permitted to commence the assessment from the point of peakindebtedness.

19 Airservices Australia v Ferrier, above n 5, at 503 (footnotes omitted). This analysis wasadopted by this Court in Rea v Russell [2012] NZCA 536 at [57].


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If at the end of a series of dealings, the creditor has supplied goods to agreater value than the payments made to it during that period, the generalbody of creditors are not disadvantaged by the transaction – they may evenbe better off. The supplying creditor, therefore, has received no preference.Consequently, a debtor does not prefer a creditor merely because it makesirregular payments under an express or tacit arrangement with a creditorthat, while the debtor makes payments, the creditor will continue to supplygoods. In such a situation, the court does not regard the individualpayments as preferences even though they were unrelated to any specificdelivery of goods or services and may ultimately have had the effect ofreducing the amount of indebtedness of a debtor at the beginning of thesix-month period. If the effect of the payments is to reduce the initialindebtedness, only the amount of the reduction will be regarded as apreferential payment.

[34] The key features of a running account, drawn from the Australian caselaw, may be summarised as follows:

(a) A payment is part of a running account where there is a businesspurpose common to both parties which so connects a payment tosubsequent debits as to make it impossible, in a business sense, topause at any payment and treat it as independent of what follows.20

(b) The amount owing to a creditor is likely to fluctuate over time,increasing and decreasing depending on the payment made and thegoods or services provided.21

(c) The effect of a payment depends on whether it is paid (i) simply todischarge a debt then owing to the creditor (including the permanentreduction of the balance of an account that is then owing) or (ii) as partof a wider transaction which, if carried out to its intended conclusion,would include further dealings giving rise to further amounts owing atthe time of payment.22

(d) A payment is part of a transaction that includes subsequent dealingseven though it may reduce the amount of debt owing at the time of thepayment, where it can be shown it is inextricably linked to furthercredits, and has the predominant purpose of inducing the provision offurther supply and it is impossible to treat the immediate effect of thepayment as the only effect.23

(e) The manner or form of keeping account of credits and debits does notdetermine the effect of the payments. Rather, whether the paymentsare in fact part of a transaction with an effect distinct from the merereduction of debt owing to the creditor by the debtor company, driveswhether the series of transactions constitute a running account. The

20 Richardson v Commercial Banking Corp of Sydney (1952) 85 CLR 110 at 133;Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 at 286.

21 Airservices Australia v Ferrier, above n 5, at 491 and 504.22 Airservices Australia v Ferrier, above n 5, at 493 per Brennan CJ.23 Richardson v The Commercial Banking Corp of Sydney, above n 20, at 128–129 and 133;

Queensland Bacon Pty Ltd v Rees, above n 20, at 283–286; Rees v Bank of New SouthWales (1964) 111 CLR 210 at 221–222; Sutherland v Eurolinx Pty Ltd [2001] NSWSC230, (2001) 37 ACSR 477 at [140]–[142].


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courts are concerned with the “business purpose”, the “businesscharacter” and the “ultimate effect” of the payments, in an objectivesense.24

The peak indebtedness rule[35] The peak indebtedness rule emerged from a dictum of Barwick CJ inRees v Bank of New South Wales, where he rejected a submission for thecreditor that the assessment of preference in a running account must commenceat the date on which the specified period began, spanning the whole period toliquidation of the company.25 The Chief Justice held instead:26

It was also said in argument for the bank that it was not permissible for theliquidator to choose a date within the period of six months and to make acomparison of the state of the overdrawn account at that date and its stateat the date of the commencement of the winding up. It was submitted thatthe proper comparison was between the debit in the account at thecommencement of the statutory period of six months and the debit at thecommencement of the liquidation ... In my opinion the liquidator canchoose any point during the statutory period in his endeavour to show thatfrom that point on there was a preferential payment and I see no reasonwhy he should not choose, as he did here, the point of peak indebtednessof the account during the six months period.

[36] This was the first mention of a peak indebtedness rule in Australia. Itallowed the liquidator to pick any period within the statutorily specified period,typically the point of peak indebtedness of the debtor to the creditor, and tocalculate the preference received by the creditor with reference only to thefurther payments made after that point. This method inevitably enhances theprospects of the liquidator being able to show a preference being received bythe creditor – by selecting the point of the highest level of indebtedness inhindsight. The goods or services provided to the debtor thereafter will (almost)never exceed the payments made in return.

Use of peak indebtedness rule in Australia[37] The peak indebtedness rule was applied in a number of subsequentcases, but nothing further by way of explanation or policy justification wasoffered in any of these. For example, in Re Weiss, ex parte White v John Vicars& Co, Gibbs J stated:27

... when the applicant trustee fails in a challenge to the validity of earlierpayments, he is entitled, in the alternative, to choose a later date as thestarting point of the examination of the net effect of operations on theaccount.

[38] In that case, the question was whether the trustee could pick alternativedates to challenge validity, having failed initially. In CSR Ltd v Starkey, the

24 Richardson v Commercial Banking Corp of Sydney, above n 20, at 133; QueenslandBacon Pty Ltd v Rees, above n 23, at 285–286; Sutherland v Eurolinx Pty Ltd, above n 23,at [142].

25 Rees v Bank of New South Wales, above n 23, at 220–221.26 At 221.27 Re Weiss, ex parte White v John Vicars & Co [1970] ALR 654 (FCA) at 661.


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creditor challenged the application of peak indebtedness, claiming that theliquidator was required to adopt the commencement of the relation-back periodas the start of the running account.28 The Court held:29

There is no logical reason why that should be so and principle suggests tothe contrary. The received view is that a liquidator can choose any point oftime during the material period as the commencement of the operations ofthe running account which gives the payee a preference, priority oradvantage over other creditors.

[39] Counsel for the liquidators in the present case provided a number ofAustralian cases which are said to demonstrate the operation of the peakindebtedness rule. One example is Rothmans Exports Pty Ltd v Mistmorn PtyLtd (in liq),30 in which the date on which the running account terminatedhappened to coincide with the point of peak indebtedness between the parties.Here, however, the liquidator had no advantage in stating a different figure forthe amount outstanding. To suggest this “applied” the peak indebtedness rule isincorrect.[40] Olifent v Australian Wine Industries Pty Ltd was the first case tointerpret and apply the new s 588FA of the Corporations Act, followingAustralian legislative reforms to its insolvency regime.31 It held that theabsence of any provision in s 588FA(2) to alter or vary the approach toassessing preference in a running account as prevailed before the amendmentsindicated the legislature did not intend to alter it.32 Accordingly, the liquidatorcould choose any point during the statutory period, including the point of peakindebtedness, to establish a preferential payment.[41] In the cases that followed, including Sheahan v Fabienne Pty Ltd,33

Sutherland v Eurolinx,34 Sutherland v Lofthouse,35 Burness v Supaproducts PtyLtd36 and Clifton v CSR Building Products Pty Ltd,37 the peak indebtednessrule has been applied without further comment or discussion. The Australiancourts seem to have assumed the rule had the weight of authority and sufficientpedigree to warrant its direct application. We have located no Australianauthorities offering a considered analysis of the rule.

Statutory form of running account principle in Australia[42] The running account principle was established in Australia in statutoryform by s 588FA of the Corporations Act 1992 (Cth).38 The statutory wordingdid not refer to the peak indebtedness rule.[43] For convenience, we set out the statutory provision. With minorvariations in wording, for example, the use of the term “unfair preferences”instead of “voidable preferences”, it is materially similar to s 292(4B):

28 CSR Ltd v Starkey (1994) 13 ACSR 321 (QSC) .29 At 325, referring to the support provided in Starkey v APA Transport Pty Ltd (1993) 12

ACSR 15 (QCA) .30 Rothmans Exports Pty Ltd v Mistmorn Pty Ltd (in liq) (1994) 15 ACSR 139 at 151–152.31 Olifent v Australian Wine Industries Pty Ltd (1996) 19 ACSR 285 (SASC). We address

these reforms in more detail below at [42]–[46].32 At 292.33 Sheahan v Fabienne Pty Ltd (1999) 17 ACLC 1,600 (SASC).34 Sutherland v Eurolinx, above n 23.35 Sutherland v Lofthouse [2007] NSWCA 197, (2007) FLR 157.36 Burness v Supaproducts Pty Ltd [2009] FCA 893, [2009] 259 ALR 339.37 Clifton v CSR Building Products Pty Ltd [2011] SASC 103.38 Appearing now in identical terms as the same section in the Corporations Act 2002 (Cth).


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588FA Unfair preferences – (1) A transaction is an unfairpreference given by a company to a creditor of the company if, and onlyif:

(a) the company and the creditor are parties to the transaction (even ifsomeone else is also a party); and

(b) the transaction results in the creditor receiving from the company,in respect of an unsecured debt that the company owes to thecreditor, more than the creditor would receive from the companyin respect of the debt if the transaction were set aside and thecreditor were to prove for the debt in a winding up of thecompany;

even if the transaction is entered into, is given effect to, or is required to begiven effect to, because of an order of an Australian court or a direction byan agency.

(2) For the purposes of subsection (1), a secured debt is taken to beunsecured to the extent of so much of it (if any) as is not reflected in thevalue of the security.

(3) Where:(a) a transaction is, for commercial purposes, an integral part of a

continuing business relationship (for example, a running account)between a company and a creditor of the company (including sucha relationship to which other persons are parties); and

(b) in the course of the relationship, the level of the company’s netindebtedness to the creditor is increased and reduced from time totime as the result of a series of transactions forming part of therelationship;

then:(c) subsection (1) applies in relation to all the transactions forming

part of the relationship as if they together constituted a singletransaction; and

(d) the transaction referred to in paragraph (a) may only be taken tobe an unfair preference given by the company to the creditor if,because of subsection (1) as applying because of paragraph (c) ofthis subsection, the single transaction referred to in thelast-mentioned paragraph is taken to be such an unfair preference.

[44] The statutory form of the running account principle came about asfollows. In 1988, the Harmer Report from the Australian Law ReformCommission expressed support for the judicially developed approach torunning accounts in insolvency.39 That report recommended the runningaccount principle be “reinforced with a statutory provision which would allowthe court to have regard to the relationship between the parties, and, ifappropriate, the history of transactions between them”.40

[45] Section 588FA was accordingly inserted into the Corporations Act by theCorporate Law Reform Act 1992 (Cth). The Explanatory Memorandum to thatBill noted:41

39 Australian Law Reform Commission General Insolvency Inquiry (ALRC 45, 1988) vol 1at [131]. The running account principle as referred to here is the principle described aboveat [33] and applied in the cases noted above at [37]–[41].

40 At [655].41 Corporate Law Reform Bill 1992 (Cth) (explanatory memorandum) at [1042].


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... where a transaction is, for a commercial purpose, an integral part of acontinuing business relationship such as a running account between acreditor and a company (including such a relationship to which otherpersons are parties), it should not be attacked as a preference, but rather theeffect of all the transactions which form the relationship between thatcreditor and the company should be taken into account as though theyconstituted a single transaction. This provision is aimed at embodying inlegislation the principles reflected in the cases of Queensland Bacon PtyLtd v Rees (1967) 115 CLR 266 and Petagna Nominees Pty Ltd v AELedger 1 ACSR 547. The effect of these principles is that it is implicit inthe circumstances in which payments are made to reduce the outstandingbalance in a running account between the purchaser and supplier that thereis a mutual assumption that the relationship of the purchaser and supplierwould continue as would the relationship of debtor and creditor. The neteffect, therefore, is such that payments ‘in’ are so integrally connected withpayments ‘out’ that the ultimate effect of the course of the dealings shouldbe considered to determine whether the payments are preferences.

[46] The final sentence just quoted addresses the approach in s 588FA(3). Itis also a clear reference to the majority of the High Court of Australia inAirservices Australia. It is noteworthy that the Australian legislative materialsrecommending the implementation of s 588FA do not refer to the peakindebtedness rule. Section 588FA itself does not define what “all thetransactions” means. In its 2003 inquiry into insolvency laws, the ParliamentaryJoint Committee on Corporations and Financial Services (the Joint Committee)heard submissions concerning the peak indebtedness rule. Despite this, norecommendations were made by the Joint Committee in respect of the rule.42

When the Joint Committee considered the peak indebtedness rule and itscompatibility with Airservices Australia, it noted the rule could be“inconsistent” but declined to make a formal recommendation on the issue.43

Developments in New Zealand[47] The enactment of s 292(4B) in New Zealand emerged from theinsolvency law reforms in 2004. The Ministry of Economic Developmentcommenced a comprehensive review in 1999 of New Zealand’s insolvencyregime.44 It promoted the adoption of the Australian position on runningaccounts and the implementation of the current s 292(4B) to replace the“ordinary course of business” test.45 It was addressed in those documents asfollows:46

Currently the corporate voidable preference regime is “effects-based” withan exception for transactions in the [ordinary course of business] (s 292 ofthe Companies Act). Because it is unclear what this test actually means, in

42 We emphasise this was despite the case law as set out above at [37]–[41].43 Parliamentary Joint Committee on Corporations and Financial Services Corporate

Insolvency Laws: a Stocktake (June 2004) at [12.40].44 Commencing with a Ministry-commissioned paper by an academic: David Brown

“Voidable Transactions – A Report for the Ministry of Commerce” (October 1999).45 Ministry of Economic Development Insolvency Law Review: Tier One Discussion

Documents (January 2001) at [5.1.2] and [5.4.1]; Ministry of Economic DevelopmentDraft Insolvency Law Reform Bill (April 2004) at 237 (draft cl 435); Ministry ofEconomic Development Draft Insolvency Law Reform Bill: Discussion Document (April2004) at [32].

46 Draft Insolvency Law Reform Bill: Discussion Document, above n 45, at [32].


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practice it is difficult to apply, and this ambiguity can lead to litigation. TheAustralian Corporations Law contains an exception for transactions thattake place as an “integral part of a continuing business relationship”. If thelevel of a debtor’s indebtedness to a creditor increases and decreases fromtime to time, during the course of a relationship, then the relationship is tobe viewed as one transaction. Therefore, the “net-effect” of the transactionsis to be considered in assessing whether or not there has been a preference.As this test is fact-specific, there is still a risk that litigation may ensue,however the advantages are:

• the test appears to work well in Australia;• it appears to be more certain than the “ordinary course of

business” test; and• it encourages trade creditors to continue supplying.

[48] Section 292(4B) was then introduced in New Zealand alongside anumber of other reforms in the Insolvency Law Reform Bill 2005.47 TheInsolvency Law Reform Bill was presented to the House in 2005.48

[49] The Explanatory Note to the Bill emphasised the principles according towhich the reforms it enacted operated, noting the “fundamental principle”underpinning insolvency law the pari passu or “equal step” principle.49 TheExplanatory Note also described the overall objectives behind the reform ofinsolvency law as being to:50

• provide a predictable and simple regime for financial failure that canbe administered quickly and efficiently, imposes the minimumnecessary compliance and regulatory costs on its users and does notstifle innovation, responsible risk taking, and entrepreneurialism byexcessively penalising business failure; and

• distribute the proceeds to creditors in accordance with their relativepre-insolvency entitlements, unless it can be shown that the publicinterest in providing greater protection to one or more creditorsoutweighs the economic and social costs of any such priority; and

• maximise the returns to creditors by providing flexible and effectivemethods of insolvency administration and enforcement whichencourage early intervention when financial distress becomesapparent; and

• enable individuals in bankruptcy to participate again fully in theeconomic life of the community; and

• promote international co-operation in relation to cross-borderinsolvency.

[50] The Explanatory Note described the new principles governing acontinuing business relationship as removing the uncertainties andinconsistencies that existed in the voidable transaction regime at the time,seeking:51

47 For a comprehensive analysis of the reforms generally, see Allied Concrete Ltd v Meltzer,above n 14, at [28]–[39].

48 The Bill in 2005 was eventually broken up into three separate Bills. For present purposes,we are concerned with only the Companies Amendment Act 2006.

49 Insolvency Law Reform Bill 2005 (14–1) (explanatory note) at 1.50 At 2.51 At 13–19.


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[To replace] the “ordinary course of business” exception for setting asidea transaction with a test along the lines of the Australian “continuingbusiness relationship”. The new test will focus on the business relationshipbetween

the parties over a certain period of time. If, in the course of such arelationship, the level of the debtor’s indebtedness to that creditor increasesand decreases from time to time, then the relationship is to be viewed asone transaction and the net effect of those transactions together isconsidered in determining whether there is a preference.

[51] The Explanatory Note also referred to the following benefits of thereform:52

The proposed amendments will increase the certainty of the legal testscontained in, and remove procedural inconsistencies between, the variousvoidable transaction provisions. This will reduce the cost for the liquidatorof pursuing voidable transactions.

A reduction in the cost of pursuing voidable transactions will alsomaximise returns to the creditors and give them more certainty that thetransactions they are entering into will not be made void. It will alsopromote business certainty for the parties involved.

With the proposed changes resulting in overturning transactions on a moreprincipled basis, the debtors will have more certainty regarding when andwhich payments should be made. The debtors will also be more aware ofwhich payments can be made void, thereby avoiding such payments andthe costs associated with making such payments.

There will be an initial period of uncertainty regarding the meaning of thenew tests, but this will reduce over time and will be mitigated by basingthe new test on an Australian test, allowing the courts to have the benefitof the Australian courts’ experience in interpreting those provisions.Overall, there will be net gains for creditors, debtors, and liquidatorsinvolved in voidable transaction proceedings.

[52] Section 292(4B) was modelled on s 588FA(3), to import the runningaccount principle into New Zealand. So much is clear from the legislativehistory set out above. Those documents consistently refer to the runningaccount principle as a replacement for the “ordinary course of business” test.The Explanatory Note to the amendment acknowledged there would be aninitial period of uncertainty, but the adoption of “an Australian test” wouldallow New Zealand courts to benefit from the Australian courts’ experience inapplying s 588FA.53

The liquidator’s appeal and cross-appealThe case for peak indebtedness[53] The liquidators ask this Court to conclude that s 292(4B) supports theapplication of the peak indebtedness rule. Ms Murphy contends thats 588FA of the Corporations Act must be taken to have permitted the

52 Insolvency Law Reform Bill, above n 49, at 24–25.53 At 25.


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application of the peak indebtedness rule.54 New Zealand adopted theAustralian provision, and this also adopted the previous Australian law onrunning accounts, including application of the peak indebtedness rule.[54] Ms Murphy refers to the High Court of Australia’s decision inAirservices Australia which, as we discuss later, appears to be contrary to thepeak indebtedness rule. She contends that to the extent the High Court did notfollow the orthodox Australian approach on peak indebtedness, that reasoningshould not be followed by this Court. Ms Murphy helpfully refers to eightcases from various State Courts and the Federal Court in which the peakindebtedness rule has been applied largely without question.55

[55] Ms Murphy contends further the peak indebtedness rule is bettercharacterised as the “net preferential receipt” approach. This is because it seeksmerely to identify and recover the net preferential receipt received by a tradecreditor. She advanced a number of grounds to as to why it should be adoptedas the conventional approach in New Zealand.[56] First, the running account analysis is merely an assessment of preferencerequiring a focus on the net difference in the debt position of the creditor(hence, her adoption of the epithet “net preferential receipt”), rather than a“wholesale exemption” from preference. The implication is that selecting thepoint of greatest indebtedness is the best approach to identifying the netdifference in debt position.[57] Second, the peak indebtedness rule is the only means of calculatingpreference in a running account that is fair and comports with the principles ofequality and equal treatment of creditors inherent in New Zealand’s insolvencyregime. Ms Murphy notes findings in New Zealand courts, which held thatrunning account creditors were not preferred. She submits that the apparentconceptual foundation for these findings “appear[ed] to be the view that if thetransactions are an integral part of a continuing business relationship, then therecan be no preference gained.” She submits this is unfair to other unpaidcreditors as it overlooks the fact that all creditors have supplied value to thefailed company. Ms Murphy submits the peak indebtedness rule avoids thisissue, because it only seeks to recover the amount of debt reduction the creditorachieved in excess of the value of further supply. Had it been Parliament’sintention to allow trade creditors to retain the benefit of debt reduction, whilstother innocent unsecured creditors receive little or nothing, “it would haveneeded to say so in the strongest possible terms”.[58] Ms Murphy contends that various statements contained in AirservicesAustralia have resulted in an erroneous approach in the decisions referred toearlier. This has led to creditors invoking the principles in Airservices Australiaas “effectively a complete answer” to voidable claims. She contends preferencelaw is concerned only with recovering the difference between payment andsubsequent supply induced by that payment – therefore it is only where “freshvalue” in the form of goods or services thereafter supplied is less than the valueof payments received that there is any net surplus to recover. The essentialthrust of this argument is that preference assessment (and therefore calculation)starts “with payment rather than with supply”.[59] Finally, Ms Murphy submits that rejecting the peak indebtedness rulewould encourage a degree of uncertainty, antithetical to the aims of the

54 Citing Rees v Bank of New South Wales, above n 23, at 220–221.55 Referred to above at [37]–[41].


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legislation. It would result in the “removal from the pool of recovery everytransaction with a creditor who benefitted from insolvent transactions” merelyupon the grounds a running account existed between the creditor and company.She submits this would be contrary to the legislation, which requires the overallamount of the preference by a creditor, as a result of an insolvent transaction,be returned to the control of the liquidators for the benefit of all unpaid,unsecured creditors.[60] We have described the liquidators’ arguments in some detail as theyassist in framing the analysis that follows. This is a vexed area of the law ofinsolvency and one that has resulted in uncertainty at first instance inNew Zealand. There is also, from our own investigations, some evidentconceptual opacity in discussions as to peak indebtedness and its alternatives.We address the arguments raised by Ms Murphy and in Farrell v Max BirtSawmills, referred to earlier, upholding the application of peak indebtedness inNew Zealand.56

Our analysis[61] The question whether the peak indebtedness rule applies in New Zealandis one of statutory interpretation. The crucial question for this Court is whether,in adopting this “Australian test” and the Australian courts’ application of thattest, alongside the statutory framework of s 588FA(3), Parliament similarlyintended to adopt the peak indebtedness rule.

The purpose of preference law in insolvency[62] We first address the purpose of preference law in insolvency.[63] The liquidation of a distressed company has an important social andeconomic function. Liquidators undertake the gathering in and collectivedistribution of available assets to the pool of creditors of the company. Thusliquidation is a compulsory process under which the previously uncheckedscramble by individual creditors to achieve any advantage available to them ishalted in favour of a collective, co-operative approach.[64] When a company becomes financially distressed, in the absence oflegislative intervention, not all creditors have an equal opportunity to recovertheir funds.57 As the Supreme Court has said in Allied Concrete Ltd, the paripassu principle is applied to ensure that creditors falling within the same classof rights are treated the same.58 The underlying aim of the voidable preferenceprovisions of the Act is to attempt to strike a balance between the interests ofall creditors in being able to share the remaining assets of the company and theinterests of particular creditors who believe the payments had been validlyreceived and they ought not to be required to pay them back.59 To the extentthat payments or other company assets are recovered by the liquidators, the fairreturn to the creditors of the company is enhanced.[65] Within the law of liquidation, rules regarding preferences are designedto achieve the following purposes:60

56 Farrell v Max Birt Sawmills Ltd, above n 11; noted above at [25].57 A Keay “In Pursuit of the Rationale Behind the Avoidance of Pre-Liquidation

Transactions” (1996) 18(1) Syd LR 55 at 83; Professor C J Tabb “Rethinking Preferences”43 SCL Rev 981 at 988.

58 Allied Concrete Ltd v Meltzer, above n 14, at [1](a). See also Companies Act, s 313(1)and (2).

59 P Heath and M Whale, above n 4, at [24.11].60 Insolvency Law Reform Bill, above n 49, at 1–2.


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(a) Equality as between creditors according to priorities set out in the Act;(b) Promoting a collective, orderly and cost-effective approach to the

management of failed companies; and(c) Sharing the burden of loss associated with corporate financial collapse.

[66] Preference laws seek to adjust the imbalance that occurs where anunsecured creditor receives a payment or payments within the two yearstatutory specified period, which represent a greater recovery than would beachieved if proving for the debt in the liquidation, along with other unsecuredcreditors. As the learned editors of Heath & Whale on Insolvency emphasise, toachieve that equality, the law recognises a period prior to liquidation must beexamined because a distressed company is often technically insolvent for sometime before formal liquidation occurs.61 Once a liquidation has occurred, thosecreditors who are better placed to exercise influence to obtain payment, or aresimply faster off the mark in seeking repayment, should not be advantaged.Thus the voidable preference provisions are not concerned with achievingfairness as between the creditor and the company, but rather fairness betweenthe creditor and other similar creditors.62

[67] On the other hand there is a need for certainty and finality in transactionsand a desire to avoid hastening corporate collapse through the suddenwithdrawal of credit facilities in times of financial distress. As theSupreme Court has said:63

... Parliament has long accepted that creditors who enter into transactionswith companies which have reached the point of insolvency are entitled toprotection in some circumstances. This acknowledges that considerationsof fairness to individual creditors are engaged in this context and that thereare risks to commercial confidence if what appear to be normal, everydaycommercial transactions are re-opened long after the event. Thisconsideration has particular relevance in New Zealand, with its highproportion of small business enterprises and the two-year period inadvance of liquidation during which transactions may be voidable underthe Act.

Legislative context[68] The legislature did not see fit to address the peak indebtedness rule, or toinclude it in the wording of s 292(4B). Section 292(4B)(c) provides that subs(1) applies in relation to “all the transactions” forming the continuingrelationship and that they are to be treated as together constituting a “singlenotional transaction”.64 The effect of the section, taken on its face, is to requireall payments and transactions within the continuing business relationship to be

61 At [24.1].62 Allied Concrete Ltd v Meltzer, above n 14, at [95], citing Farrell v Fences & Kerbs, above

n 13, at [63].63 Allied Concrete Ltd v Meltzer, above n 14, at [1](b) (footnotes omitted).64 We note in passing that initial apparent issues with the definition of “transaction”, and how

that word featured in s 292(4B), have been resolved. See, for example Blanchett vMcEntee Hire Holdings Ltd HC Rotorua CIV-2010-463-270, 5 August 2010 at [51]–[54];Shephard v Steel Building Products (Central) Ltd, above n 5, at [29]–[33]; Jollands vMitchill Communications [2011] NZCCLR 20 (HC) at [13]. In Olifent v Australian Wine,above n 31, for example, the Supreme Court of South Australia addressed the issue of theuse of the word “transaction” throughout s 588FA in different contexts – namely “atransaction” must be construed as the same transaction as that in later parts of s 588FA,and a series of transactions, encompassing the flow of goods and services, which in turnmust be construed as “one single transaction” (an interpretation resulting in assessing the


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netted off against one another. This includes both payments to the creditor andthe supply of goods to the debtor. Of course where the business relationshipbegan before the start of the two-year period, only the transactions occurringwithin the period are taken into account. The statutory wording does not permita liquidator to disregard some of those transactions. There is also no basis onwhich the liquidator can commence with only the first payment, and disregardthe first supply of goods. The plain meaning of “all transactions” is just that.[69] We consider the plain meaning of “all transactions” is all transactionsconstituting an integral part of the continuous business relationship andtherefore falling within the running account. On this approach, the assessmentof these transactions will commence when the two-year specified periodcommences.65 Where, as with Z Energy, the running account starts only afterthe specified period has commenced, the starting point is the first transactionduring the running account falling within the specified period. It follows fromthis position that to arrive at some artificial point during the course of all therelevant transactions and to select the date of peak indebtedness (resulting inthe transactions prior to this point being disregarded), would be to ignore theexpress wording used by Parliament.[70] The liquidators in this case contend that the wording of s 292(4B) canbe made to support this interpretation, because the statutory wording shouldyield to purpose. The argument is that the clear legislative intention behind andpurpose of s 292(4B) was to adopt Australian law applying to running accountsin its entirety and therefore also the peak indebtedness rule. The provisions arealmost identical in both Australia and New Zealand; if the Australian provisioncan support the approach, so too can New Zealand’s provision.[71] We turn now to assess the arguments that what we consider to be theplain meaning of s 292(4B) should be disregarded.

Importing s 588FA into New Zealand law[72] We are satisfied that the legislative history of s 292(4B) centred onremoving “ordinary course of business” and replacing it with the runningaccount.66 As noted, there is no discussion, anywhere, of the peak indebtednessrule. Nor was the peak indebtedness rule referred to in any of the preparatoryand research materials engendering the law change, either from the LawCommission or the Ministry of Economic Development (or the academic reportcommissioned by the Ministry of Commerce).67 We consider the reference inthese materials to the “Australian test” and the Australian courts’ experiencewith that test was a reference to the principles applicable to a continuingbusiness relationship.68

aggregate of the individual transactions as preferences, contrary to the statutory purpose).This interpretation was rejected by the Court and we reject it also. See, for a furtherdiscussion of the issue, Farrell v Max Birt Sawmills, above n 11, at [62].

65 A position consistent with the temporal framework for all other preference assessments inthe Act, and therefore in line with the scheme of the Act generally.

66 For this reason also, we reject Ms Murphy’s contention that the running account wasintended to replace the change of position defence. There is simply nothing to support thatsubmission.

67 David Brown, above n 44; Insolvency Law Review: Tier One Discussion Documents,above n 45; Draft Insolvency Law Reform Bill: Discussion Document, above n 45,discussed above at [47]–[52]. Indeed, the explanatory memorandum to the Corporate LawReform Bill, above n 41, itself discussed the principles in two cases it was seeking tocapture in its draft s 588FA(3), upon which s 292(4B) is modelled. Neither of these it apeak indebtedness case – rather both concern the operation of the running account:


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[73] As a matter of principle, we reject Ms Murphy’s submission that theadoption by the legislature in New Zealand of s 588FA(3) in similar languageof necessity involved the importation of the peak indebtedness rule. Thelegislature was plainly aware of the principles of Australian case law governingthe running account provisions but it does not follow that the peak indebtednessrule must also be adopted.[74] As noted earlier, the Australian legislation relied on the decision of theHigh Court in Airservices Australia which, as we go on to explain, isinconsistent with the peak indebtedness rule. As we have already noted,subsequent Australian decisions appear to have applied the peak indebtednessrule on the ground that it is settled law, without analysing its relationship to thelegislation.

Airservices Australia v Ferrier[75] We turn to consider the decision in Airservices Australia. The CivilAviation Authority (the predecessor to Airservices Australia) provided airnavigation services to an airline company, Compass Airlines Pty Ltd. Theliquidators applied to recover $10.35 million that the company had paid to theAuthority by nine payments during the six-month period before thecommencement of the winding up, as payments which had the effect of givingthe Authority a preference, priority or advantage over the other creditors.Despite those payments, the company’s indebtedness on its account with theAuthority increased by $8.18 million during that period. The company and theAuthority both understood that the provision of further services depended onthe company’s making payments to reduce its growing debt. The liquidatorsclaimed that at the time of the last payment ($1.7 million on18 December 1991), the Authority strongly suspected that the company wouldcease operations the next day.[76] The Court held there was, in effect, a running account showing regulardebits and credits between the company and the Authority, which in turnindicated a continuing relationship contemplating further debits and credits andthat the making of these payments was intended to continue and not todetermine the relationship. Having regard to the ultimate effect of the paymentsand not to the immediate effect of each payment, none other than the lastpreferred the Authority over the other creditors.[77] The majority of Dawson, Gaudron and McHugh JJ equated a runningaccount with the doctrine of “ultimate effect”. Thus, the running accountdoctrine was designed “to ensure that the effect of a payment that induces thefurther supply of goods and services is evaluated by the ultimate effect that it

Queensland Bacon Pty Ltd, above n 20 and Petagna Nominees Ltd v Ledger (1989) 1ACSR 547 (WASC). This point is demonstrated with some analysis of the key findings ineach case. In Queensland Bacon Pty Ltd, the Court set out the “classic” statement of thelaw for running accounts, being (as per Barwick CJ) at 286: “ ... it is enough if, on thefacts of the any case, the court can feel confident that implicit in the circumstances inwhich the payment is made is a mutual assumption by the parties that there will be acontinuance of the relationship of buyer and seller with resultant continuance of therelationship of debtor and creditor in the running account ... ”. It was the first statement asto the mutual assumption requirement and is seen as the first classic articulation of therunning account principle. No mention of peak indebtedness is made. In PetagnaNominees, the Court set out the modern application of the running account, affirmingQueensland Bacon at 563–565. Therefore the express references in the legislativematerials to the “Australian tests” in question are not references to peak indebtednesscases, although there were many to choose from.

68 Namely, those set out above at [33]–[34].


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has on the financial relationship of the parties”.69 The result of this analysis wasthat, in the majority’s view, all payments other than the final payment weremade as part of a running account, and so the “ultimate effect” of all thesetransactions between the Authority and Compass must be assessed.[78] The majority stressed that a payment cannot be viewed in isolation fromthe general course of dealing between the creditor and the debtor:70

... a payment made during the six month period cannot be viewed inisolation from the general course of dealing between the creditor and thedebtor before, during and after that period. Resort must be had to thebusiness purpose and context of the payment to determine whether it givesthe creditor a preference over other creditors. To have the effect of givingthe creditor a preference, priority or advantage over other creditors, thepayment must ultimately result in a decrease in the net value of the assetsthat are available to meet the competing demands of the other creditors.

[79] If the company pays an outstanding debt in order to induce a creditor tomake further supplies available, then provided that the value of the fresh goodsor services is equal to or greater than the payment, the company and its othercreditors are no worse off than they were before. The majority emphasised:71

Thus, it is not the label “running account” but the conclusion that thepayments in the account were connected with the future supply of goods orservices that is relevant, because it is that connection which indicates acontinuing relationship of debtor and creditor. It is this conclusion whichmakes it necessary to consider the ultimate and not immediate effect of theindividual payments.

[80] This analysis of the running account doctrine is difficult to reconcilewith the concept of peak indebtedness. As one Australian commentator hasnoted:72

The value of any goods or services supplied by the creditor after thecommencement of the preference period but prior to the date chosen by theliquidator is simply disregarded for no real reason, even though the samecontinuing business relationship existed at both times.

[81] If the principle in Airservices Australia is that the ultimate effect must beconsidered in ascertaining the results of a running account, there is no doubt thepeak indebtedness rule does violence to that principle.73 As earlier discussed,the liquidators contend this conclusion has been misused in New Zealand,incorrectly forming a “complete answer” to voidable claims. They submit

69 At 509.70 At 502 (footnote omitted). It seems that the “ultimate effect” doctrine is an integral part of

the running account principle and continues alongside and to assist interpretation ofs 588FA(3): see V R Dye & Co v Peninsula Hotels Ltd (in liq) [1999] 3 VR 201 (VSCA)at [27]–[28] and Sutherland v Lofthouse, above n 35, at [34]. See also Farid Assaf, BrettShields and Hilary Kincaid Voidable Transactions in Company Insolvency (LexisNexis,Chatswood (NSW), 2015) at [4.62].

71 At 505.72 Hal Bolitho “Continuing Business Relationships – Eight Questions in Search of an

Answer” (1998) 16 CSLJ 584 at 599.73 For an attempt to reconcile the two concepts, see Ken Barlow “Voidable Preferences and

the Running Account – the High Court reconsiders” (1998) 26 ABLR 82. We notehowever, in this article the peak indebtedness principle was of peripheral relevance to theauthor’s general point, and its validity is assumed throughout as opposed to being directlyaddressed and affirmed.


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preferences in the case of a running account should be assessed by looking tothe first payment, rather than supply. That would ensure the “net preferentialreceipt” is considered, rather than using a running account to constitute in effecta complete defence to a preference claim.[82] The problem with this analysis is that it disregards the first advancementof supply, which would fall within the concept of “all transactions” in therunning account as per s 292(4B), with no compelling explanation.Commencing with “payment” still requires the liquidator to select a payment,in the middle of the “single transaction” and assess preference only from thatpoint onwards.74 The relevant question still remains: why should this be thestarting point, in light of the clear statutory wording? The liquidators’ positionassumes an answer to this question, without justifying it. It goes no further inoffering a principled reason why the supplies prior to the first payment shouldbe ignored in the “entire transaction”.[83] In New Zealand, various High Court decisions have attempted to grapplewith Airservices Australia and what it means for peak indebtedness.75

Associate Judge Bell in Max Birt considered Airservices Australia did notdirectly consider peak indebtedness reasoning; the relevant comment was obiterdicta and accordingly does not affect the peak indebtedness rule and itsoperation.[84] It is correct Airservices Australia was not a “peak indebtedness” case,but that was because there was no question the creditor had not been preferred.Whether or not a running account existed, Airservices Australia had clearlyprovided services in excess of any payment it had received. The key issueconcerned the application of the running account on the facts. The centraldetermination of the High Court was the relevance of the doctrine of “ultimateeffect” to that quantum assessment. Peak indebtedness did not apply on thefacts but Airservices Australia was still a running account case.

Practical effect of peak indebtedness[85] Some commentators have promoted the peak indebtedness rule asproviding a practical and appropriate measure of recovery by liquidators.Damien McAloon put it thus:76

A creditor may have been fortunate to have had their indebtednessesreduced by payments made by the company prior to its liquidation.However, in replying upon a running account to reduce its exposure tounfair preference claims, the point of peak indebtedness may serve as anappropriate measure of the amount recoverable from the creditor for thebenefit of other creditors. The creditors will include those who did notreceive such payments and/or did not suspect the company’s insolvency.This may be so even if this amount recovered is not necessarily an accuratemeasure of the net benefit received by the creditor defending theliquidator’s claim.

74 It is uncommon, although not unheard of, for payment to the supplier to be the first stepin the transaction. This is, however, very unlikely. The practical effect of Ms Murphy’ssubmission is that, by starting with payment, there will always be a net preference.

75 Associate Judges Abbott and Doogue both agreed it indicated peak indebtedness should berejected: see above at [16] and [19] respectively.

76 Damien McAloon “Ultimate Effect” or maximum recovery? – should liquidators be ableto apply the “peak indebtedness rule” to running accounts when pursuing unfairpreference claims?” (2006) 14 Insolv LJ 90 at 96.


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This justification for the peak indebtedness rule is supported by the likelypractical consequences if the rule was to be abolished. The unfairpreference provisions would still operate in a somewhat arbitrary fashionby reason of the applicable fixed time period. However, without the peakindebtedness rule, the arbitrary timing of the notional “single transaction”would often operate to deprive liquidators of any meaningful recovery inrespect of unfair preferences. Liquidators would be less inclined to pursuepreferences as the amount likely to be recovered (without the applicationof the peak indebtedness rule) may not justify the time and expenseinvolved. As a consequence, the assets available for distribution to thegeneral pool of creditors would, in some circumstances, be reduced ...these considerations appear to be the key justification for the peakindebtedness rule.

[86] McAloon himself, however, recognised that there is a case for abolishingthe rule.77 He noted that the Australian Credit Forum in its submission to theJoint Committee sought the abolition of the peak indebtedness rule on the basisthat it was “contrary to the principle of equal treatment (pari passu) whichunderpins all avoidance provisions”. The Australian Credit Forum submissionreferred to various scenarios involving a creditor/debtor relationship in whichthe peak indebtedness rule would operate with a discriminatory effect.78 Theseexamples are revealing and instructive.[87] The Australian Credit Forum gave some examples to demonstrate theproblems with the peak indebtedness rule. It posits three creditors, Creditor 1,2 and 3. Each has provided Company X with a $10,000 credit limit. At thebeginning of the specified period, the debtor’s level of indebtedness to eachcreditor is $60,000. At the end of the specified period, the debtor owes eachcreditor $10,000 once more. In each case, the creditor has provided $60,000worth of supplies to the debtor, and has been paid $50,000. Assuming forpresent purposes these are correctly classified as running accounts, and theprinciple in s 292(4B) (or s 588FA(3) as the case may be) applies, there wouldbe no net preference. Taking the running accounts as single transactions, inrespect of Creditors 1, 2 and 3, payments did not exceed supply.[88] The Credit Forum demonstrates, however, if each creditor adoptsdifferent credit terms, the peak indebtedness results in a different preferencecalculation, despite, in substance, their having offered equal supplies andreceived equal payments. Creditor 1 may not require payment on any specificterms; Company X receives the goods advanced, and advances payments afterthe full advancement of goods to the value of $60,000. The point of peakindebtedness will be $60,000 and the preference will be as much (the previoussupplies being disregarded prior to this point).[89] Creditor 2 imposes credit terms keeping to the credit limit, thereforeadvances goods to the value of $10,000 and receiving payment of as much eachmonth. The point of peak indebtedness will only ever reach $20,000, and thepreference received after that point will be $10,000. Creditor 3 on the otherhand, may impose credit terms requiring payment after three months. Itadvances supplies to the value of $30,000, after which Company X advances

77 At 94.78 Details of the scenarios are set out in sch 1 to McAloon’s article at 97–98.


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$20,000 and returns to within the credit limit, thereafter receiving goods andpaying in $10,000 instalments. In that case, peak indebtedness is $30,000 andthe creditor received a preference of $20,000.[90] These illustrate the arbitrariness of peak indebtedness in operation.Despite each creditor advancing the same value of goods to Company X andreceiving the same payments in return, the peak indebtedness rule can operateto produce vastly different outcomes, merely on the basis of the particular creditarrangements in each case. Contrary to the arguments advanced by theliquidators there is no connection between the “preference” received by onecreditor, and the entitlement of another. Each creditor is a trade creditor inprecisely the same ultimate circumstances, but is treated differently.[91] Some commentators have identified similar concerns. Hal Bolitho, forexample, has noted:79

This rule can accordingly work to the detriment of continuing businessrelationship creditors, particularly where a period of regular tradingincludes isolated large orders which are ultimately paid for. The liquidatorcan simply take the date after such an order was delivered and show agreater reduction in the net indebtedness, where had the liquidator taken anearlier date the order and its payment would cancel each other out.

[92] The practical operation of the peak indebtedness rule is, therefore,problematic. Nevertheless the liquidators contend the policy behind s 292(4B)and the overall insolvency regime require its adoption in New Zealand. We turnnow to address this final argument.

Policy justification[93] The central policy justification for the peak indebtedness rule ispredicated on the pari passu rule: that insolvency law is based on equaltreatment of equal creditors. It is contrary to that rule to allow trade creditorswho are paid to receive a benefit over other trade creditors who are not paid.This is a benefit at the expense of other trade creditors (or even all otherunsecured creditors generally), and must be disgorged and returned to the poolfor distribution generally. The High Court in Max Birt Sawmills accepted thispolicy argument as the key basis for peak indebtedness. Trade creditors shouldnot be treated as a separate class of creditors entitled to an absolute defence topreference claims. The solution then, is the peak indebtedness rule. We rejectthis as a matter of both practicality and policy.[94] First, on a practical level, there is simply no correlation between thequantum of the amount calculated as a preference taken from the peakindebtedness of one creditor and any entitlement of any other creditor. Bydefinition, that is driven by the circumstances of the trading between thecompany and each individual creditor. Any payment to a particular creditorharms other creditors only to the extent of the bare fact that value taken out ofthe general pool of resources. Of itself, this is not an injustice to other creditors,nor does it disadvantage them. This is because, by definition, trade creditorseither return the value they receive in supplies, or must return the value of theirpreference over and above supplies provided as an insolvent transaction.[95] Second, on a policy level, it was the purpose of enacting s 292(4B) togive effect to Parliament’s intention to set apart certain trade creditors from the

79 Hal Bolitho, above n 72, at 599. See further A K Thompson “‘Peak Indebtedness’ theory:an abuse of the ‘running account’ defence?” (2011) 85 ALJ 374.


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general pool of unsecured creditors. That is not a problem with the operation ofs 292(4B) – that is a problem with its existence. We set out above theprincipled basis for the running account and its adoption. As was emphasised inAllied Concrete, the reforms intended to extend protection to trade creditors andeliminate the “ordinary course of business” test to promote certainty.80 Tradecreditors would have an incentive to continue providing value to companies infinancial distress, and recourse for ordinary creditors fell under s 296(3).Ms Murphy’s submission that it is unfair to prefer certain trade creditors is amatter for legislative concern and not a matter for judicial intervention.81

[96] Finally, to the extent there is a concern about the potential“over-inclusion” of commercial relationships in the definition of “tradecreditors” to unjust effect, we consider that is assuaged by a careful applicationof running account principles to individual cases. All parties presently camebefore us having accepted the existence of a running account in each case.Accordingly, the question of the precise scope of the principles governingrunning accounts, for example, when it commences, when it should be held tohave ended and what payments fall within and outside of it, are not an issue inthese appeals.82

Allied Concrete[97] One final factor supports our rejection of the peak indebtedness rule. InAllied Concrete Ltd v Meltzer the Supreme Court was faced, in interpretings 296(2), with what it described as a stark choice between competing policies.While the discussion focused largely on the issue of commercial certainty, theCourt noted the difficulty in balancing the interests of promoting collectiverealisation of assets in liquidation against the interest in ensuring fairness toindividual creditors, giving value in good faith.83 The Supreme Courtconcluded that s 296(3) was one way in which Parliament had expresslyprovided for mechanisms to ensure fairness to individual creditors could beachieved where necessary, alongside the general principle of promotingcollective realisation of assets to all creditors.[98] The distinct treatment of trade creditors is, in our view, a similarmechanism. Parliament took the decision to set aside a particular group ofcreditors who continue to provide credit and goods on the assumption of futuretrade. That is seen as having distinct commercial benefits in the context ofliquidation. It is a policy choice consistent with New Zealand’s insolvencyscheme generally.

80 At [21].81 This is notwithstanding the fact the peak indebtedness rule would not actually resolve that

concern – trade creditors can still prove a running account exists and benefit from that.The peak indebtedness approach merely arbitrarily enhances the quantum a liquidator canclaim back. It does not eliminate the underlying concern evinced in Ms Murphy’ssubmissions.

82 For example, the fact that Z Energy’s running account fell entirely within the specifiedperiod does raise the question of whether the final payments were truly made for thepurpose of inducing further supplies – the final payment in Airservices Australia wasconsidered to be entirely “backwards-looking”. The applicability of that aspect of theHigh Court’s reasoning may require clarification in that regard.

83 At [105]–[107]. As the reasoning of Associate Judge Bell was influenced by the views ofthis Court in Farrell v Fences & Kerbs Ltd [2013], above n 13 (as the passage cited at [25]above makes clear) the Supreme Court decision in Allied Concrete Ltd v Meltzer rendersit redundant.


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Conclusion on peak indebtedness[99] We are satisfied the peak indebtedness rule is not part of the law inNew Zealand. If Parliament had intended to adopt it, it could have done sowithout difficulty. It chose not to do so. Any change to the legislative policy aswe have interpreted it would be a matter for Parliament. We therefore dismissthe liquidators’ appeal and cross-appeal.

Timberworld’s appeal[100] Timberworld advances three grounds of appeal against the decision ofAssociate Judge Abbott:

(a) The liquidators failed to prove that Northside was unable to pay itsdebts as they fell due, and therefore payments received byTimberworld were not impugnable.

(b) The Judge erred in interpreting s 292(4B) (being the running account)as limited to the specified period, and not “all transactions formingpart of the relationship”.

(c) The Judge erred in declining to exercise its powers under s 295 of theAct.

Did the liquidators prove Northside was insolvent?[101] Associate Judge Abbott concluded the liquidators had proved Northsidewas insolvent at the relevant period and rejected Timberworld’s challenges tothat effect. Specifically:

(a) The financial records to which Timberworld referred the Judge wereconsistent with Northside’s insolvency.

(b) Northside’s outstanding tax debt was admissible and proved it wasunable to pay its debts.

(c) In light of those two factors, the fact Northside continued paying tradecreditors was of no moment.

[102] Timberworld now appeals against these findings. It repeats thechallenges to the liquidators’ proof of Northside’s insolvency it made beforeAssociate Judge Abbott. These are, briefly:

(a) The liquidators only provided financial accounts for 2008 and 2009 toprove Northside was insolvent. These pre-date the relevant period andthese also show Northside was able to pay its debts (Timberworldcontends they show Northside had money in its accounts and wastherefore solvent).

(b) The IRD claim was the only document in evidence that was capable ofproving Northside was insolvent. But this was retrospective, did notreconcile with the financial records produced and was notaccompanied by evidence showing it was outstanding debt, demandedfrom Northside.

(c) The company continued to trade and earn (what Timberworld assumedwere) substantial funds.

(d) The Court failed to distinguish between a company being “unable” topay its debts as they fall due, as opposed to “choosing” not to pay itsdebts. Timberworld contends Northside simply chose not to pay itsdebts, but it was capable of doing so.

[103] We do not accept these contentions. Associate Judge Abbott determinedthat the financial accounts presented in evidence before him gave a clear and


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sufficient picture as to Northside’s financial position before and during therelevant period. The 2009 financial statement, for example, includedtransactions for the 12 months prior to and including March 2009. Given thespecified period started on 24 May 2009, less than two months later, the Judgeconsidered this to be adequate evidence of Northside’s financial health prior toentering into liquidation. Coupled with the bank statements, and the breakdownof unpaid and overdue debt accompanying various pleadings in evidence, weare satisfied sufficient evidence was presented to prove Northside was unable topay its debts as they fell due.84 Finally, in light of that position of insolvency,which we accept was proved, we do not accept that Northside merely chose notto pay its debts. This ground of appeal is dismissed.

Interpretation of s 292(4B) – all transactions or specified period?[104] Timberworld also appeals on the basis Associate Judge Abbott erred inholding the running account defence is restricted to the specified period, asopposed to “all transactions forming part of the relationship” when interpretings 292(4B).[105] The Judge addressed this issue in the course of his reasoning as to thecommencement of the continuing business relationship.85 He accepted theliquidators’ argument that, when construed in the context of s 292 as a whole,the single transaction created by s 292(4B) is determined by reference topayments and supplies made only in the supplied period. This was a logicalcorollary to the underlying rationale of the continuing business relationship,removing the ability to isolate and attack individual payments. This was alsoconsistent with s 292(1)(b), rendering an insolvent transaction made in thespecified period voidable. The Judge rejected Timberworld’s argument to thecontrary.[106] Timberworld appeals this finding on the basis that the phrase ins 292(4B) “all transactions forming part of the relationship” should beinterpreted to mean all transactions in the running account itself. To findotherwise would be to add and delete words variably from the statutoryprovision, in circumstances where it is contrary to legal principle to do so.[107] A number of Australian decisions, interpreting this question on the termsof s 588FA(3) have resolved this issue against Timberworld’s interpretation.Although there is an issue of interpretation with the definition of “transactions”,it is now settled the provision applies to transactions occurring within thespecified period, to ascertain whether a net increase or decrease in indebtednessresulted.86 Associate Judge Abbott was correct to find, when assessed in its

84 For example, the financial statements indicated a net deficit after tax in 2008, liabilitiesexceeding assets in 2009 and the primary asset being an overdrawn shareholder’s accountin both years. Trading activities in both years were generating modest deficits andNorthside was operating with a working capital deficit. The bank statements demonstratedNorthside had insufficient cash assets to meet its debts. Further, the liquidators referred toa document breaking down the lump sum of tax liability the company owed to InlandRevenue as a “snapshot” of its liabilities, accumulating the total penalties and interest thathad accrued on that debt to liquidation. Further, the allocation of payments betweenaspects of tax liability (be that core tax debt, or penalty interest payments) is irrelevant towhether the company could pay its debts as they fell due – as Associate Judge Abbottnoted. The picture, as a whole, pointed clearly to Northside’s insolvency.

85 At [46]–[50].86 Occasionally, where the entire running account relationship commences within the

specified period, the transactions will commence at a later period in time than the specifiedperiod – that is consistent with this interpretation. What matters is the assessment ofpreference by reference to the single transaction, which can only be preferential when it


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statutory scheme and in light of its purpose,87 the running account is limited inoperation to the specified period. Although s 292(4B) does not specificallyreference the specified period, we are satisfied its operation is intended to besubject to the principle contained in s 292(1) to that effect. As noted earlier inthis judgment, the interpretation limiting the running account in such a way isthe interpretation which gives effect to the provision in the manner intended byParliament.88 To adopt Timberworld’s interpretation would undermine thestatutory purpose.[108] We reject this ground of appeal.

Application of s 295 of the Act[109] In the High Court, Timberworld argued it would be inequitable to orderit to repay the payments made to it by Northside. It relied on s 295(a) and (b)of the Act. Those provisions provide:

295 Other orders – If a transaction or charge is set aside undersection 294, the court may make 1 or more of the following orders:

(a) an order that a person pay to the company an amount equal tosome or all of the money that the company has paid under thetransaction:

(b) an order that a person transfer to the company property that thecompany has transferred under the transaction: ...

[110] The reasons Timberworld says it would be unfair to order it to repay themoney are:

(a) Northside’s insolvency arises out of its debts to the Commissioner ofInland Revenue, which the Commissioner allowed to accumulate from2004 and in respect of which the Commissioner took no steps torecover until 2011. At that stage the debt had accumulatedsignificantly, with more than half constituting penalties and interest.

(b) Timberworld had no knowledge of this worsening tax position andwas prejudiced by the Commissioner’s inaction.

(c) It would be unfair in the circumstances that the Commissioner shouldbe the sole beneficiary of any repayment of debt.

[111] Associate Judge Abbott considered, however, that Parliament hadspecifically prescribed in s 296(3) conditions under which a payment must notbe set aside in liquidation, on the basis of unfairness to the creditor. Heconsidered therefore, that although there was some discretion to be exercised ins 295(c) in making orders, given the prescription set out in s 296(3), the

occurs in the specified period.87 With particular emphasis on the workability of s 292(1), requiring insolvent transactions

made in the specified period be voidable.88 See above at [68], and above n 64. This is consistent with the Australian position, as set

out in Olifent, above n 31, at 516–517: “I do not think the legislature can be taken to haveintended the actual starting date of the continuing business relationship is the relevant datefor the purposes of ascertaining the extent of the preference if the relationship commencedbefore the commencement of the [specified period]. If that were the position then in thecase of the running account, the opening balance would, if it were not a nil balance, be nomore than the opening entry on the account and it is almost inevitable that, incircumstances where the debtor company eventually goes into liquidation, the closingbalance would exceed the opening balance. In that case a preferential payment wouldrarely occur ... ”. We agree the legislature cannot be taken to have intended such anoutcome.


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threshold for invoking this residual discretion in s 295 ought to be very high.89

Anything less would undermine the statutory scheme established throughs 296(3) and would be an unprincipled departure from the basic principle offairness between creditors.90 While the Judge accepted an element of unfairnessin the situation before him, he did not consider it to reach the threshold requiredto invoke s 295.[112] Timberworld essentially repeated before us the submissions made in theHigh Court. Counsel referred to the legislative history of s 295, which itcontends indicates an express purpose to protect creditors from “unfairness” ofprecisely this kind.[113] We see no reason to depart from the reasoning of Associate JudgeAbbott. No grounds or arguments were advanced to us to persuade us that theJudge’s reasoning was flawed. The statutory scheme created by s 296(3) shouldbe preserved. We agree with counsel for the liquidators that Timberworld canpoint to no “unfairness” that is not an intended consequence of the operation ofthe voidable preference regime, seeking to do justice to all creditors treatedequally.[114] It follows Timberworld’s appeal must be dismissed.

Result[115] The appeal and cross appeal in CA842/2013 are dismissed. As thehonours are shared there will be no order as to costs.[116] The appeal in CA226/2014 is dismissed. The respondent is entitled to anorder for costs. The appellant must pay the respondent costs on a standardappeal on a band A basis plus usual disbursements.

Appeals in CA842/2013 and CA226/2014 dismissed. Cross-appeal inCA842/2013 dismissed.

Solicitors for Timberworld Ltd: Foy & Halse (Auckland).Solicitors for the liquidators in CA842/2013: Ford Sumner (Wellington).Solicitors for the liquidators in CA226/2014: Gregory Simon Law

(Auckland).Solicitors for Z Energy Ltd: Minter Ellison Rudd Watts (Wellington).

Reported by: Edith PA Shelton, Barrister

89 Being something beyond a general sense of unfairness – requiring instead some cogentand compelling factor going beyond a s 296(3) defence.

90 Given that unfairness to a specific creditor qua creditor has been clearly enumerated ins 296(3) – adding more by a sidewind would detract from that.


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Timberworld Ltd v Levin - Amazon S3...Burness v Supaproducts Pty Ltd [2009] FCA 893, [2009] 259 ALR...

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